SEC Chair Jay Clayton: No Bitcoin ETFs Until There Is Greater Oversight; “Assume Your ICO is a Security”
Securities Exchange Commission Chair Jay Clayton is reluctant to add digital currency ETFs, including Bitcoin ETFs, over fears of market manipulation, centralization, and custody security.
Speaking at Consensus Invest in New York, Clayton said he will not support ETFs for a financial product until there are measures in place to ensure that it is free of manipulation. As stated by Clayton:
“What investors expect is that trading in a commodity that underlies an ETF [needs to] makes sense and is free from the risk of manipulation. . . It’s an issue that needs to be addressed before I would be comfortable [adding digital currency ETFs].”
Unlike other markets, cryptocurrency exchanges do not have the same protections from market manipulation. Both the New York Stock Exchange and Nasdaq have surveillance measures in place to monitor and prevent manipulation and other kinds of abuse. On the matter Clayton asserts:
“Those kinds of safeguards do not exist currently in all of the exchange venues where digital currencies trade. . . When you see an asset trade on [the] Nasdaq or NYSE, there’s a great deal of surveillance preventing you and me from teaming up and pretending we’re decentralized. Those sort of safeguards do not exist in a lot of markets where digital currencies trade.”
This sentiment is not isolated to those in the SEC. It is a common thread among cryptocurrency enthusiasts that ‘whales,’ or large volume market participants, are actively using trades to manipulate prices. And, there is some evidence to suggest such manipulation, for example, Tether’s potential illicit activity in the market.
In addition to these concerns, Clayton underlines that existing ETFs are not at risk of “theft or disappearance,” indicating that Bitcoin and other digital currencies are not as secure as other traditional assets. And, in light of the number of high profile hacks, he may be right.
So far the SEC has rejected several proposals to include Bitcoin and other cryptocurrency ETFs, including a bid from high-profile crypto venture capitalists the Winklevoss twins. However, Clayton’s skepticism is not surprising and mirrors the overall reluctance of the SEC on the topic.
‘Assume’ Your ICO is a Security
Clayton had another message for initial coin offerings during the conference:
“You should start with the assumption that you’re starting with a securities offering.”
His statement comes after the SEC ramps enforcement actions against cryptocurrency projects, including its first civil penalties against two successful ICOs: ParagonCoin and AirFox.
In contrast to that, the SEC’s William Hinman (Director, Division of Corporation Finance), commented that Bitcoin and Ether may be treated as commodities based on a “sufficiently decentralized” test. However, Chairman Clayton later emphasized that “… staff statements are nonbinding and create no enforceable legal rights…”
That said, all other cryptocurrencies, by extension, may be securities by the SEC’s definition—until stated otherwise. Those who do not register their tokens as a security are subject to penalties ranging from hefty fines to the outright return of investor funds (rescission). Not only that, in addition to the SEC, states are also ramping up enforcement actions in their local jurisdictions.
In further comments on decentralization, Clayton reiterates that:
“when a store of value becomes truly decentralized [and there’s] not one person or group of people controlling its supply… we’ve [the SEC] said that is distributed… It does very much have to do with the ability to direct the enterprise.”
When pressed on the security status of Ripple (XRP) Clayton declined to answer.
In the short term, this certainly doesn’t help the market downturn. But, in the long run, the SEC may consider integrating cryptocurrencies, ETFs, and other securities into the broader market once better oversight is established and regulations are stress-tested. Until then, the market will need to find another avenue of reprieve.